ABSTRACT
This chapter examines three broad theoretical perspectives. They are concerned with the role of money, asymmetric information, and speculation in the development of financial crises. Milton Friedman has a theory of financial crises which is based upon his monetarist perspective. The asymmetric information problem is one of a general class of situations involving agency problems. These arise because of a divergence between the interests of the principal and the principal's agent. The focus on the interruption of financial trade is reinforced by the approach of Ben Bemanke, whose analysis of the Great Depression was a key step in applying the asymmetric information analysis to the phenomena of financial crises. The chapter considers theories that explain financial crises by viewing them in the context of a speculative runup in asset values. Since speculation played such a large role in the financial crises of the 1980s, this approach should be helpful in understanding the dynamics of that decade.
